Charter Communications Inc (CHTR) — Q4 2022 Earnings Call Transcript

Good morning, and welcome to Charter's fourth quarter 2022 investor call. The presentation that accompanies this call can be found on our website, ir.charter.com, under the Financial Information section. Before we proceed, I would like to remind you that there are a number of risk factors and other cautionary statements contained in our SEC filings, including our most recent 10-K filed this morning. We will not review those risk factors and other cautionary statements on this call. However, we encourage you to read them carefully. Various remarks that we make on this call concerning expectations, predictions, plans, and prospects constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ from historical or anticipated results. Any forward-looking statements reflect management's current view only, and Charter undertakes no obligation to revise or update such statements or to make additional forward-looking statements in the future. During the course of today's call, we will be referring to non-GAAP measures as defined and reconciled in our earnings materials. These non-GAAP measures, as defined by Charter, may not be comparable to measures with similar titles used by other companies. Please also note that all growth rates noted on this call and in the presentation are calculated on a year-over-year basis, unless otherwise specified. On today's call, we have Chris Winfrey, our CEO; Tom Rutledge, our Executive Chairman; and Jessica Fischer, our CFO. With that, let's turn the call over to Chris.

Thanks, Stefan. We continued to execute well within a challenging market backdrop in 2022, and we remain excited about the industry's future and Charter's in particular. We added over 340,000 Internet customers in 2022 despite the previous pandemic pull forward and a low activity environment. We also continued to see very strong mobile line growth, with full year line net additions of over 1.7 million. As of the end of 2022, we had 5.3 million total mobile lines. So we're growing mobile lines rapidly even in a low volume environment by saving customers hundreds and often thousands of dollars per year. That growth creates value for Charter and supports broadband growth. For the full year, we grew our consolidated revenue by 4.5% and our adjusted EBITDA by close to 5%. The planned December management transition with Tom moving to Executive Chairman is also going very well, and I'm pleased Tom will join us in today's Q&A. In 2023, in the coming years, we remain primarily focused on three broadband initiatives: evolution, expansion, and execution. Each of these initiatives is designed to drive customer growth and long-term cash flow growth. Starting with evolution. Already in 2023 and over the next three years, we will evolve our network to ubiquitously offer symmetrical and multi-gigabit speeds. We'll deploy these new speed offerings at a much faster pace and at a much cheaper cost than our competitors, just $100 per passing. And we'll maintain our marketing speed claims. We're also evolving our go-to-market approach with increasing convergence. We recently launched Spectrum One, which combines our Internet, advanced Wi-Fi, and mobile products for the fastest seamless connectivity. During the fourth quarter, we saw continued sell-in of mobile to our large Internet base, and our Spectrum One converged offering helped drive our strongest quarter yet for mobile lines. The potential for mobile to be a significant driver of new Internet sales is still largely untapped as we educate nonsubscribers of the Spectrum One value proposition. With nearly 5.3 million lines created over a four-year period, it is clear that our converged customers have meaningfully lower Internet and customer relationship churn. And while some of that churn benefit may be self-selection, mobile drives better churn and ultimately, acquisitions for Charter. Our second area of focus is the expansion of our footprint. Line extension construction is an important part of our 2023 growth plan and beyond and offers good growth and returns to visibility. We hope to complete our RDOF build ahead of the original commitment, and that faster completion is good for our returns, the communities where we build obviously, and it creates credibility for future subsidized builds and option value for future growth. As we also mentioned in December, we've been successful in winning a number of other state and local grants in 2022 and expect the same in 2023. And we expect, assuming a reasonable regulatory framework, to participate in the $42.5 billion BEAD program. The initial results of our rural construction initiative have been very promising. We constructed over 200,000 new rural passings in 2022, and penetration of passings open at least six months is ahead of our expectations at about 40%. Over time, we expect our rural construction initiative to be a significant contributor to our customer growth with attractive mid- to high-teen internal rates of return. And finally, we remain focused on executing on our core operating strategy, all to further improve customer experience, raise customer satisfaction and drive customer growth. We're doing that in a number of ways, including the continued digitization of our customer service model in ways that enhance the customer experience, accelerating our proactive maintenance initiative to address service issues before customers even see an impairment, and investing in training and tenure for our employees to continue to improve our service and sales capabilities. Longer tenure leads to better execution with higher sales, lower service transactions, lower churn, and more products per customer over time. So we have a large growth opportunity in front of us through network evolution, convergence, and continued operational execution and a very unique opportunity to expand our footprint. We have a successful operating model to address the opportunities in front of us. It's the same strategy that we've deployed for years. It's about having the fastest connectivity and products and pricing and packaging that are difficult for customers to replicate, and putting that all together so that we provide more product into the household, more penetration across our passings, and then marrying that with high-quality service with fewer service transactions and lower churn. That all drives higher long-term recurring cash flow. We then take that sustainable cash flow model and put it together with an innovative capital structure and a disciplined approach to ROI-driven capital allocation between organic investment expansion and/or M&A and buybacks, and you get Charter. So we have a great path in front of us to deliver long-term shareholder value creation, which means delivering for our customers, employees, and local communities. With that, I'll turn the call over to Jessica.

Thanks, Chris. Before getting started, I want to remind you that we will be making a couple of changes to our reporting beginning next quarter. First, as we noted in our investor meeting in December, we'll include mobile service revenue in residential and SMB revenue as appropriate. We will no longer report mobile expenses separately, and both of these changes better reflect the converged and integrated nature of our mobile business and our operations and our offer structure. Second, we will provide additional line extension capital and rural disclosures. And finally, I want to note that while our fourth quarter results contain some modest impacts from Hurricane Ian, the overall impact of the hurricane on our financials and customer numbers was very small and doesn't warrant separate disclosure. Let's turn to our customer results on Slide 5. Including residential and SMB, we added 105,000 Internet customers in the fourth quarter and added 344,000 over the last 12 months. Video customers declined by 144,000 in the fourth quarter. Wireline voice declined by 233,000, and we added a record 615,000 mobile lines. For the full year, we added 1.7 million mobile lines. Although our Internet customer growth continued to be positive in the fourth quarter, activity levels remain low. During the quarter, we saw both lower Internet churn and lower Internet connects than in the fourth quarters of 2021, 2020, and 2019. Total churn, voluntary churn, and non-plate churn were all lower year-over-year, and we're at all-time lows for the fourth quarter. Move return remains well below pre-pandemic levels, which also reduces our selling opportunity. Gross additions remain down across the footprint by similar amounts in overbuild and non-overbuild areas, similar to what we've seen in the past few quarters. In terms of competitive impact, some of the lower gross additions we see probably relate to DSL conversion going to a new entrant, fixed wireless, instead of coming to us. But given the issues with fixed wireless, product reliability and scalability, we expect those customers to find their way to us over the long term. In addition, we've seen a slightly higher pace of fiber overbuild recently. And I would also note that we've seen a small amount of market share return to mobile-only service over the past several quarters, the reversal of some COVID effects. Despite these challenges with lower market activity, our Spectrum One product is working. We remain in the early stages of offering converged packages of products, and refinement to our approach continues, but we're very pleased with the results. Moving to financial results, starting on Slide 6. Over the last year, residential customers grew by 0.2% year-over-year. Residential revenue per customer relationship was flat year-over-year, with promotional rate step-ups and rate adjustments offset by a higher mix of non-video customers and a higher mix of lower-priced video packages within our base. Also keep in mind that our residential revenue and ARPU does not reflect any mobile revenue, although that will change next quarter when we make the reporting adjustments I discussed a moment ago. In addition, we're allocating a portion of Spectrum One-related customer revenue from Internet to mobile revenue under GAAP. As Slide 6 shows, total residential revenue grew by 0.4% year-over-year. Turning to commercial, SMB revenue grew by 2.4% year-over-year, reflecting SMB customer growth of 3%. Enterprise revenue was up by 4.9% year-over-year. And excluding wholesale revenue, enterprise revenue grew by 9.1%, and enterprise PSUs grew by 4.4% year-over-year. Fourth quarter advertising revenue grew by 25% year-over-year, primarily driven by political revenue. Core ad revenue was down by 3%, with lower national and local advertising revenue driven by the softening ad market, offset by our growing advanced advertising capabilities. Mobile revenue totaled $876 million, with $401 million of that revenue being device revenue. Other revenue grew by 4.9% year-over-year, mostly driven by higher rural construction initiatives subsidies, partly offset by lower processing fees and lower video CPE sold to customers. In total, consolidated fourth quarter revenue was up 3.5% year-over-year and up 4.5% for the full year 2022. Moving to operating expenses and adjusted EBITDA on Slide 7. In Q4, total operating expenses grew by $359 million or 4.6% year-over-year. Programming costs declined by 3.3% year-over-year due to a decline in video customers year-over-year and a higher mix of lighter video packages, partly offset by higher programming rates. Looking at the full year 2023, we expect programming cost per video customer to be approximately flat year-over-year. Regulatory connectivity and produced content declined by 5.3%, primarily driven by lower regulatory and franchise fees and lower video CPE sold to customers. Cost to service customers increased by 5.8% year-over-year, driven by higher labor costs, higher fuel and freight costs, and higher bad debt, partly offset by productivity improvements. Excluding bad debt from both years, cost to service customers grew by 4.9%. And while bad debt was higher year-over-year, it remained below pre-COVID levels. As we noted in our December investor meeting, we're making very targeted adjustments to job structure, pay and benefits, and career paths inside of our operations teams in order to build an even higher skilled and more tenured workforce, which drove the higher labor costs. These adjustments will add some pressure year-over-year to cost to service customers' expense growth in the first half of this year. But that year-over-year growth should moderate in the second half of 2023. And we continue to expect additional efficiencies in cost to service customers over time as a result of the continued digitization of service, productivity improvements, and our network evolution investment. Marketing expense grew by 6.9% year-over-year, primarily due to the higher staffing levels I mentioned and wages, which included targeted adjustments in our sales channels. Mobile expenses totaled $982 million and were comprised of mobile device costs tied to device revenue, customer acquisition and service, and operating costs. And other expenses increased by 6.6%, primarily driven by higher labor costs and higher advertising sales expenses related to higher political revenue. Adjusted EBITDA grew by 1.9% year-over-year in the quarter and 4.8% for the full year 2022. Turning to net income on Slide 8, we generated $1.2 billion of net income attributable to Charter shareholders in the fourth quarter compared to $1.6 billion in the fourth quarter of last year, with higher income tax and interest expense more than offsetting higher adjusted EBITDA. Turning to Slide 9. Capital expenditures totaled $2.9 billion in the fourth quarter and $9.4 billion for the full year 2022. Our total CapEx for the year reflects the timing of more accelerated equipment inventory receipts in December than expected. Fourth quarter capital spending of $2.9 billion rose above last year's fourth quarter spend of $2.1 billion, primarily driven by higher line extension spend driven by our rural construction initiative. Capital expenditures, excluding line extensions, increased from $1.6 billion in last year's fourth quarter to $2 billion this quarter, driven by investment in network evolution, higher customer premise equipment spend on advanced Wi-Fi equipment and timing of spend. For the full year 2023, we continue to expect capital expenditures, excluding line extensions, to be between $6.5 billion and $6.8 billion. So excluding line extensions, we expect a small increase year-over-year in capital spend driven by the acceleration of network evolution spending partly offset by declines in other areas. Following the expected completion of our network evolution initiative at the end of 2025 or the beginning of 2026, CapEx, excluding line extensions as a percentage of revenue, should decline to below 2022 levels and continue to decline thereafter. Turning to line extensions. In 2023, we expect line extension capital expenditures to reach approximately $4 billion. We expect 2024 and 2025 line extension CapEx to look similar to our outlook for 2023 at approximately $4 billion per year. And our 2024 and 2025 line extension capital expenditure expectations assume we win funding for or otherwise commit to additional rural spending. We also expect most BEAD money to begin to be appropriated in the 2024 timeframe with four-year build timelines from grants. At that time, we expect that our RDOF spend will begin to ramp down. We expect the BEAD program to present a unique and attractive opportunity for us to expand our network with subsidies, generating significant returns that solidly exceed our cost of capital. For our additional subsidized passings, we expect our net rural construction cost per passing to be closer to the roughly $3,000 per passing that we've incurred in our recent subsidized state and local builds than to our RDOF per passing costs. Our six-month penetration of passings in our newly built rural areas continues to be around 40%, and we expect penetrations in these areas to continue to grow. If you use the cost per passing that I mentioned a moment ago, a high broadband penetration assumption, which we think is reasonable, our current ARPU, excluding mobile, a high incremental margin based on low incremental overhead costs and a reasonable terminal multiple or perpetuity growth rate, you can clearly see the very attractive IRRs associated with our rural builds. Turning to Slide 10. We generated $1.1 billion of consolidated free cash flow this quarter versus $2.3 billion in the fourth quarter of last year. The decline was primarily driven by higher capital expenditures, mostly the result of our rural construction initiatives and by higher cash tax payments. For the full year, we generated $6.1 billion of free cash flow versus $8.7 billion in 2021. However, excluding cash taxes and our rural construction initiative, our full-year free cash flow grew by 4%. We finished the quarter with $97.4 billion in debt principal. Our current run rate annualized cash interest is $5 billion. As of the end of the fourth quarter, our ratio of net debt to last 12-month adjusted EBITDA was 4.47 times. We intend to stay at or just below the high end of our 4 to 4.5 times target leverage range. During the quarter, we repurchased 3.6 million Charter shares and Charter Holdings common units totaling about $1.3 billion at an average price of $344 per share. For the full year, we repurchased 23.8 million Charter shares and Charter Holdings common units totaling approximately $11.7 billion. We have a proven operating balance sheet and capital allocation model that drives customer and financial growth and shareholder value. We've always prioritized investments that generate long-term growth, and those investments ultimately protect and extend our return of capital to shareholders. We continue to generate significant free cash flow and intend to both invest for long-term growth and simultaneously return excess capital to shareholders in the form of buybacks. Operator, we're now ready for Q&A.

I'm wondering if you could give us a little bit more context around the strength we saw in wireless this quarter. How much of that is coming from selling into your existing base of customers versus new customers that you're bringing in the door? And really what I'm sort of trying to unpack is some way to kind of analyze the pull-through effect that the Spectrum One is having on broadband acquisition, separate from sort of the impact it has on lowering churn. And then you said that the opportunity for sort of driving this converged bundle is really untapped at this stage. Can you remind us of what penetration is of accounts with wireless at the moment? And where you think that could sort of potentially get to in the long term?

And on the second question, Jonathan, I don't have the exact numbers in front of me, but roughly, it's 3 million relationships that have mobile, and if you take the residential base of approximately 28 million, I guess you got to combine it with SMB so about 30 million. So that gives you a sense there. On the impact of Spectrum One, I think the potential here for acquisition remains the biggest opportunity in terms of driving Internet net adds. Our wireless net additions in the quarter were largely driven by existing Internet upgrades still. So 75% to 80% of the lines came from existing Internet customers upgrading, which means they’re paying lines, maybe get the second line for free or the third line paid for, with the majority of those being paying lines. This means the inverse of that is that new connects are also attaching mobile as well; even new Internet connects are connected with mobile as well, although we're in a low transaction environment, which means we have lower gross adds. So there's a mathematical opportunity to increase both our Internet net adds and our convergence with even more mobile line adds as the market picks up. But there's the bigger opportunity, which is as we continue to message into the marketplace, the value and the benefits of a converged product— which really across our footprint, we're the only provider who can make those claims and offer a better product with what we call gig-powered wireless. I think the real opportunity for Spectrum One convergence and wireless is to have a meaningful impact over time on Internet net additions, but it's early on. And I think because it's a completely new category, it's going to take a little while to educate the marketplace. The bulk of our wireless gains today are still coming from existing Internet customer upgrades.

Chris, do you have a sense of how many of the broadband adds you might not have got, but for the Spectrum One offer with wireless?

It's a tricky question because the customers are going in for a sale, and we're attaching global Internet at the same time. So I think the easier way to think about it is to look at our progression between Q3 and Q4 with a few caveats. One is that there's always seasonality. Those are typically strong quarters in a year. The second caveat is that when you have a large number of adds and a large number of disconnects inside the business, which all of us do, it can create outsized variability and outsized conclusions on your net adds because a small difference in your gross adds or a small shift in your churn can have an outsized impact on your net adds. Now as we hopefully return to a higher net add growth rate and that variability declines, that mass still remains. So from a Q4 perspective, we still have low transaction volume for all the reasons that Jessica mentioned. And we’ve also experienced factors that Jessica highlighted, so people should consider that. But the bridge between roughly 75,000 Internet net adds in Q3 has a bit more rural behind us, and Spectrum One was contributing as well. Both of these were contributors to the small uptick that we saw in Q4. The bigger issue we face, as we keep on saying, is just the lower transaction volume in the marketplace, resulting in fewer selling opportunities — which means fewer selling opportunities for Spectrum One and at the same time as we educate the marketplace on the benefits of that converged product.

A couple for Jessica. Just wanted to confirm that the $4 billion of line extension you're calling out for '24, '25, that's sort of the other limit, assuming that you win in BEAD, and it could be potentially low? Is that sort of a budgeting sort of expectation just for clarification? And then given the higher sort of CapEx you have in the next few years, can you help us think about what it means on taxes? Is there sort of a new shield that we can get from the build?

Yes. So the $4 billion, Vijay, I do think that it's kind of a budgeting exercise, but it's our expectation, and it's on the higher end of our expectations. But it all depends on what we win and subsidized builds. And so it really is a matter of what's available and what makes sense from an ROI perspective for us to spend and to try to earn additional passings and generate additional returns. But I think the $4 billion is where we think that we will be based on our expectation of what will happen right now. So that's probably the way to think about that. On the cash tax, our cash tax liability is always dependent on a number of different variables. We're a full cash taxpayer now. We've previously given guidance on taxes. If you look back, I think at what we said in Q4 of 2021, and there's more CapEx in the plan now, which generally should reduce that liability. But because you don't have 100% deductibility, you don't get 100% credit for that anymore. As a result, I would look back at that guidance. And we might be slightly above the percentages that we gave there, maybe 1% or 2% higher, but you can generally look back to that to estimate cash tax.

So Vijay, on the rural build, clearly, we've disclosed what we've won so far on the state grants that primarily come out of ARPA and NTIA funds. The BEAD process is still ongoing. The rules have not been fully clarified. They need to be right in order for it to make sense for us to invest, and we think they will be. But once the maps are clarified and contested, there will be grants given out to the states to how the funds are distributed. The states will then have their own process for allocation. So in some sense, our outlook here is really dependent on the rules that are set, the timing of the allocation to the state, and how the states distribute. And so we're trying to provide some outlook based on the best view that we have today. But a lot of that's not entirely in our hands, and we're going to do our best to continue to provide updates along the way to the extent that we have better information.

Chelsea, we'll take our next question, please.

I have two questions. First, could you elaborate on margins? It seems challenging for us to understand the wireless margins given the rapid growth in the subscriber base and the potential high customer acquisition costs. How should we approach the margin trajectory for wireless and the overall business in the future, especially since the reporting will no longer be separate? Secondly, could you explain the decision to upgrade your physical plant without achieving symmetrical speeds, while maintaining higher downstream speeds compared to upstream speeds?

So Craig, on the margins question, I would tell you that, first off, we wouldn't be willing to do the Spectrum One offer if we didn't have some space in margin. Our margins in that business, if you exclude the subscriber acquisition costs, continue to be quite good. And they're getting better over time because we continue to drive down some of those business expenses on a per customer basis, things like the operating cost and what it takes to run billing and customer care. And actually, the reason that we're pushing those into our broader reporting is that we continue to integrate the business into our broader business. A lot of that activity deals with a customer as one customer. When you have a sales call, you're selling mobile and cable on the same call. When someone calls in with a question, you have agents who are capable of dealing with both. I think the overall trajectory, we make margin on the customers today. We have offers in the mix that we're using to drive both mobile and broadband activity, and they work well for that. I think we should think about them as being related to both that mobile and broadband activity. But we expect the margins to continue to grow. I think we gave some numbers in the presentation in December, and you can see the trajectory that we're on there. I think that margin expansion continues when considering the broader product.

I'll comment a little bit on the network question. So your question was whether the choice to not upgrade to symmetrical. Just as a reminder for everybody, the first 15% of the upgrade is going to be with DOCSIS 3.1 high split using integrated CMTS. That will give us up to 2 by 1 in a 15% footprint. So if we can make that one by one, we could make that somewhere in between and make it symmetrical. We have the capabilities. It's just based on our assessment of where the market value is. We're planning for 5 by 1 in 50% of the footprint and what we think is a base case of 10 by 1 using 1.8 GHz DOCSIS 4.0 RPD in 35% of the footprint. Now—the reason we're choosing not to go all the way to symmetrical speeds is based on our view that today, the upstream demand is more of a marketing campaign rather than any real product demand. We want to lead in those marketing claims, which is why we're doing what we're doing. We also have marketing claims from what we'll be deploying here that allows a fiber drop in the— as a remote OLT inside of the node. This gives us marketing claims across the entire footprint for 25 symmetrical and over time, 50 or 100-gig symmetrical. It's hard to imagine the need for those at present, but it at least gives us a marketing edge in these communities to have that type of speed, not different from what we do with enterprise already today. We have a lot of flexibility. That's what we really like about this plan. We can go fast. We can do it at a low cost. We can reset the up and downstream and pivot where we need to go at a competitive price. We can do it at a faster pace and at a cheaper cost than all of our competitors and be ahead of any potential overbuild with a better product for the long term.

And Craig, this is Tom. I just want to add one thought on the margin. The gross margin of the mobile business is actually a high-margin business. It's improving with penetration and it improves both at the gross level and the operating level. And relative to video, which is a low-margin business and declining, but even more dramatically, is the impact of the increased revenues that are coming in from mobile and the high margins associated with them. So the overall margin in the business is improving going forward.

I wonder if, Chris—two, if I can. One, Chris, can you just talk about the broadband market? Is penetration in your legacy footprint growing? And talk about the— what you mentioned was incremental fiber competition and how that sort of evolves over time? And then second, Jessica, you gave a ton of detail on costs and I appreciate it. Can you just quantify a little bit for us that increase in cost of service in the first half as well as the programming cost commentary, a lot of people wondering how are some programming numbers are flat in '23?

So Phil, let me parse the broadband market a bit. Clearly, in areas where we don't have a gig overlap, we are growing and continue to grow despite a low transaction volume marketplace. And despite some of the rollback to post-pandemic mobile-only that Jessica described, I don't think it will go all the way back, but we're all seeing a little of that taking place. In that space, typically in a gig overlap area, you have newly minted overbuild and you have existing overbuilt. In existing overbuild, we're growing while newly minted, you face a small setback initially because you have a competitor entering the marketplace. In the fourth quarter, reflected by all passings metrics that we look at, we actually grew despite that higher fiber overbuild happening within our footprint in the fourth quarter. So I think that's positive. It’s small, as seen in the net add numbers. But I think it's promising for the future, and that's even before benefiting from additional marketing claims through the network evolution, as well as having clear support for sales with further network expansion and having a fundamentally different product than any of our competitors can offer through a converged offering that has gig powered wireless. Those initiatives won’t happen in Q1 or Q2, but they will gradually increase and improve our position and ability to grow. The biggest factor would be if we can get market volume returning; that would be the most significant contributor to growth beyond the things I mentioned. As a tangential note, we have not— as we've discussed, we have not seen any demonstrable impact on our churn as it relates to fixed wireless access. We believe it may have had some effects on our gross adds, especially for customers we would have pulled from DSL, but when pricing actions were taken in December, we saw for the first time, a very limited impact on our voluntary churn. But not where we would have expected it. It's primarily in our non-gig overlap and MDU footprint where you have greater churn to customers, higher tendencies to move around, and higher tendencies to non-pay. While it may just be a blip, it's important to note that those customers tend to be very mobile. I believe that experience with that product is likely to incentivize a return to a reliable broadband product with or without convergence. So that’s food for thought around that; I hope that answers your question.

So on your other two questions, in cost of service, quarter-over-quarter growth in Q4 was 5.8%. I would expect Q1 to be similar. For year-over-year growth to decrease across the year until you're more in line with the historical growth trajectory we've seen, which has generally been flat. Regarding programming per sub cost, the reason that they remain flat year-over-year is rooted in customer mix and whether customers are choosing larger channel sets, premium options, or whether they are priced out of those packages and switching to skinnier versions where the programming cost per sub is lower. So, it's essentially a mix issue and not due to programming rates being static.

We used to talk about them.

Go ahead.

Sorry. No, I was just going to ask, do you have some room on—we used to discuss the sort of small video package mix and how that might peak out at some point? Is that an issue anymore? Or can you kind of put people wherever you want in terms of packages?

Maybe we’ll ham and egg this between Tom and myself. But I want to address what headroom we have. We still have the ability to create packages that offer value to consumers. Our philosophy has always been to give our customers what they want. And typically, they want more programming, and we try to provide that at the best price possible. Also, it’s aligned with what they're willing to pay. This flexibility of packages enables us to sell more video products, benefiting the programmers. While we are seeing losses, they're significantly lower than those of our competitors. This result can be attributed to our ability to drive video based on consumer desires and their payment capabilities, which sometimes conflict. I believe this model has worked and will continue to do so. However, I also think that as we look into the video space's future, programmers will need to recognize our efforts and consider our ability to present unbundled options than what they currently do through direct-to-consumer and OTC effectively unbundling themselves.

It is. So I guess I'm ham or the egg, I'm not sure what you want me to be. We still have limitations on what we can do contractually, but we've been moving those limitations as we renew contracts. However, the industry is structurally in a challenging place from a video perspective. You have a very high-priced package with everything included. Many content companies offer much lower-priced packages, and unbundling those can generate considerable value for consumers. However, this new model requires different sales tactics. We've been trying to operate within those constraints to offer the best product we can. I also believe that we could solve some of the problems present in the video space and drive growth for both the company and the programmers, but it's crucial for them to understand this.

I think Xumo could help; that's the design. If you take the best parts of the Comcast platform, including the voice remote, and combine that up within our footprint with Spectrum TV app and live video with all the various packages, we can tailor to consumers' needs and budgets. I think that's quite powerful. And as we can continue to change the requirements that Tom mentioned in our programming agreements, we can potentially sell more.

I just wanted to follow up on the programming cost discussion, and then I had a quick housekeeping item on mobile, if I can. So on programming costs, the guide for it to be flat year-over-year is quite remarkable in many ways. Jessica, I know you just characterized it as a mix issue. I wanted to see if you're seeing an acceleration in subs taking these lighter packages or cord shaving overall. And relatedly, you've been very vocal about the tensions with programmers for many years now. Is there anything else to call out in terms of Charter maybe taking a harder line with programmers in recent renegotiations, whether it's in terms of pricing or even carriage of certain networks overall? Or maybe again, we shouldn't read into it, and it's purely just a consumer mix shift issue? And quickly, just a housekeeping question on wireless, as we all try to better understand the industry-wide postpaid phone trends, any chance you could help size how much of your 5.3 million mobile lines are phone versus tablets?

I don't have the split in front of me for the 5.3 million, but the vast majority is driven by connectivity services. We’re selling mobile service, and to the extent that a customer wants additional devices, we have that offer available. Our view here is to drive Internet acquisition as well as Internet churn and to enhance profitability; we can achieve a higher ARPU by offering mobile service combined with broadband service.

To clarify, on the guidance, it's programming cost per sub that is flat year-over-year. The mix shift isn't significantly different from what we've seen previously. The base is smaller. As the mix of incoming customers differs from the base, but the mix shift isn't substantially different.

In terms of position with programmers, Tom mentioned the margin issue within video, and we've discussed content availability practically everywhere, sometimes for free due to piracy. We've previously noted the challenges related to that. So it's fair to say we're not necessarily taking a harder stance; we're more indifferent to carrying certain content at increasingly higher prices when alternatives exist in the market at cheaper rates or even for free. The two main issues with content continue to be retransmission fees for over-the-air content, which we are compelled to pass to our customers, and the development of sports channels is important and ties into what I described.

I think at the Analyst Day, it was suggested that broadband net adds would be better in 2023 than 2022, and that 2023 would have EBITDA growth. I'm just wondering, Chris, on the broadband net add side, what gives you confidence that 2023 could be better than 2022? And then I guess, jump all, but maybe for Jessica, on EBITDA, do I remember that right? The expectation is EBITDA growth in 2023? And I know you guys are not fans of guidance, but what are the swing factors that can impact that? And any thoughts on cadence if you are willing to offer would be helpful. And then—sorry, just—I’ll ask it all at once. Chris, I’m just curious as a follow-up. You said the pricing action was maybe just a blip that it was like the first time. You've had pricing actions in the past which have resulted in churn, right? I wasn't sure what you saw for the first time when you mentioned a blip in churn?

Yes. The 2023 broadband net adds, I said our goal is to have higher broadband net adds this year, and I think we will. The biggest variable that's out there is what's happening with market transaction volume, and that's the only one that gives me anxiety because it’s the one you can't control. But we have a lot of factors working in our favor, starting with the broadband initiatives that I've spoken about. So clearly, with a larger base of rural passings constructed and increasing over the year, I think the small but early success of Spectrum One in driving Internet sales will only grow as that product becomes established. I think the investments we've made in our personnel—not to get too deep into the details—are leading to better performance. The labor cost increase that Jessica discussed represents targeted initiatives. These were not blanket increases but focused on driving returns. A more experienced workforce generally delivers superior performance in sales and customer service. Based on what we have seen, we have had the lowest attrition rates in our service and sales teams at the end of Q4 that I've observed in a very long time, if ever. I believe this will benefit our overall outcomes, both in terms of gross adds and lower churn. But as I mentioned, the key uncertainty we face relates to market activity. All else equal, our goal is to increase net adds this year.

On the EBITDA side, as you mentioned, we don’t provide guidance, but we are confident in expecting growth in 2023. We anticipate customer growth and rate increases. We also expect the rates will hold steady across our customer base. I’d remind you that we will be lapping last year’s rate increases in April. As for timing, the second quarter is likely where we might face some challenges. But as Chris said, we have made investments in improving efficiency from our tenure initiatives and through ongoing digitization. We believe these improvements will support EBITDA growth year-over-year.

You mentioned pricing action and some potential confusion there, but I want to clarify what we’ve done. Our approach hasn't changed. We're focused on providing competitive products at the best market prices and packaging to facilitate faster growth. Considering the events in video space, we've continued to pass along rate increases that reflect rises in programming costs observed mid-last year. Given current economic conditions, they remained at the forefront of customers’ minds, and we adjusted pricing for Internet services in Q4, ensuring we combined that pass-through with a consolidated service experience for customers. This adjustment has yielded muted engagement on the customer response side. I haven't observed a significant increase in churn linked to the pricing adjustments we've implemented.

A few questions on the rural build. Jessica, thanks for all that detail at the beginning on the non-RDOF pieces. I think you talked about $3,000 of passing costs. Should we think about that as $5,000 gross? And do you have visibility into the timing of when you'll receive those subsidies and also the accounting treatment of revenue versus CapEx, so we can think about trying to give you those benefits as we layer on the spending? I don't know if you're willing to disclose what you think you'll build in 2023; I’m guessing no. But we can make our own assumptions. If we think you're going to build to, say, 500,000 rural passings in 2023, is there any way to help us think about how many of those you'll sell into over the course of the year? I assume by this point, you guys are improving in getting this stuff operational and to market. So any help on the timeframe and lag from what you've learned so far would be helpful.

Yes. To start, we expect to construct around 300,000 subsidized rural passings in 2023, mainly from RDOF and these will be additional to our typical build pace. Regarding the penetration success rates, we’ve shared insights about achieving about 40% penetration for those newly constructed passings within six months. We expect further growth after we achieve that milestone. Our starting pace at the beginning of the year is currently in the range of 15,000 to 20,000 passings per month, and we plan to increase towards our total of 300,000. The $3,000 per passing is a reference point; we anticipate this net cost in upcoming state subsidies and the BEAD build structure. These programs will likely treat subsidies as a capital offset rather than as revenue, so we’re approaching it with net figures. As for gross build costs, estimating those precisely is quite challenging since they rely significantly on bidding outcomes and our competitive positioning.

As we look at this matter, Ben, if you reference the presentation from December, I displayed an unnamed market with a footprint overlap. This presentation showcased how our strategy evolved between several grants in our existing footprint. We can effectively lower our gross build costs and therefore net costs relative to our competition thanks to our established network. We are the principal builder in rural areas, and our execution speed and market reputation enable us to quicken our broadband delivery for local communities at a competitive price, along with exceptional Internet and mobile products. Many of our competitors lack comparable capabilities.

That's very helpful. Can I just ask a clarification from your comment? I think you mentioned nonpay churn, all forms of churn at record lows in Q4, including non-pay. But I think you also mentioned bad debt was coming back up. Just any comment on the consumer, the low-end consumer. Some of your competitors have talked about non-pay churn normalizing. Was it—didn't sound like we're seeing that, but I wanted to hear your thoughts?

I believe I’ll leave it for Jessica to elaborate. Our metrics are showing dramatic improvements; non-pay churn is currently much lower than pre-pandemic levels and is low overall. Meanwhile, bad debt has started to rise back to previous levels. It has increased slightly on a year-over-year basis but stands far below where it was. In January, we typically keep intra-quarter specifics private; however, we are starting to notice slight increases in both non-pay and bad debt. While this trend initially seems concerning, it might reflect the market’s move toward normalcy regarding transaction volumes. With time, the adverse effects of these developments will diminish, allowing opportunities for sales to grow. It’s a bit of a double-edged sword.

Additionally, I would note we've been key players in the ACP and are staunch advocates of that program. For customers more likely to experience non-pay situations, we’ve put significant effort into ensuring they’re aware of this program, aiming to make Internet more affordable for them. This has led to two relevant outcomes. Firstly, those customers are less likely to churn than before, and as a second impact, some customers switching to the ACP program may lead to increased carry-over balances, consequently reflected in our bad debt calculations. While our bad debts might be numerically higher this quarter, they’re not strictly connecting to non-pay churn as we’ve converted such customers into ACP beneficiaries.

Thanks, Ben. Operator, that concludes our call.

Thank you, everyone.

Thank you.